VIDEO: Hog outlook optimistic

Feed prices and demand from China are the wild cards

DES MOINES, Iowa — Hog farmers should have good profits this year, weaker profits next year and a rebound in 2018, a leading U.S. market analyst told farmers at the World Pork Expo.

However, in the complicated mathematics of hog production economics, a number of factors could substantially alter that profitability forecast.

Steve Meyer of Express Markets Inc. noted the recent rally in crop futures prices, but expects it won’t last.

“We think it’s a weather scare,” he said of the crop rally. Stronger feed prices would erode hog producer profits.

If Meyer’s most reasonable expectations hold, U.S. hog farmers would earn an average of $8.58 per hundredweight this year, which is good by historical standards.

“Profitability for this year still looks to be pretty good,” he said.

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Farmers face close to break-even prices next year, but 2018 looks like a return to substantial profits.

However, wild cards include:

  • the switch from El Nino to La Nina
  • China’s demand for U.S. pork
  • fourth quarter packer capacity

Hog profitability is based on the spread between crop prices and pork prices, which means anything that significantly swings either variable much has an outsized effect on the profit margin.

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Meyer said he is skeptical of the widespread fears that U.S. crops will be ravaged by drought this summer because of an expected switch from El Nino to La Nina.

He said the markets fret every year in early June about possible coming weather impacts, but he thinks the switch to La Nina will happen too late to have much impact on U.S. crops.

He also believes today’s hog futures prices are too high.

Fair price analysis suggests they should be a few dollars lower. Today’s prices are justified only if China comes into the market for massive imports of U.S. pork.

Meyer doubts China would play a big enough role for long enough to keep prices inflated.

However, Iowa State University economist Dermot Hayes said he thinks China will likely keep buying large amounts of U.S. pork this year because domestic policies reduced Chinese production.

That factor should disappear in a year or two, he said, but it is not surprising this year to see China importing pork in a big way.

Meyer suggested farmers lock in late 2016 hog prices for a portion of projected production, noting the prices are good and the potential for a packer capacity problem late this year.

Packer capacity was pushed to the limit a couple of weeks late last year. That will get worse this year.

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“This fall, it looks like we’re going to get there probably for six or eight weeks,” said Meyer.

Hog price crashes are tightly connected to hog numbers exceeding slaughter capacity.

However, two large slaughter plants should open in the United States next year, so that problem should disappear for a few years.

Capacity should have been a problem in recent years, but unexpected factors kept it from becoming too bad.

In 2013, hog supplies were restrained by the high feed prices of the 2012 drought rally, and in 2014, porcine epidemic diarrhea virus also reduced hog numbers, taking pressure off the system.

However, as PED receded last year, it became clear that hog numbers can grow too quickly for the system to handle.

Meyer’s forecast for profits of US$8.58 per hundredweight could turn out cautious if Chinese demand continues and crop prices fall.

“It could go from a pretty good year to a very good year if these costs go back down.”

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